Frugal Homeowner®

QUESTION: We were amazed to learn that interest rates have dipped below 5%. Weren’t they expected to increase, especially giving the “home buying” season of the year? We have “okay” credit and thought we’d wait to buy until our credit score got better. But these low interest rates have us thinking perhaps we’ll jump now to buy a house. What do you think?—DF

ANSWER: With mortgage interest rates lower than they’ve been since 1953, it’s enticing to jump into the mortgage market with both feet. But home buying isn’t just about being able to qualify for and afford the monthly payment. You need to be careful because that type of thinking is exactly what overleveraged buyers in the previous housing market and contributed to the housing meltdown.

You’re correct that we thought we’d see higher interest rates by this time of year. In part, interest rates often increase during the peak summer home buying season. But this year, with international investors fleeing European investments in favor of more stabile United States securities, interest rates have dropped to all-time lows, lower than they’ve been in more than fifty years. For example, a $200,000 mortgage loan at a previous interest rate of 5.75% (the median rate that approximately 50 percent of current mortgage holders have) would require a monthly principal and interest payment of $1,167. Conversely, the same $200,000 at today’s low interest of 4.6% would be $1,015 principal and interest or a payment of $142 less per month. And should you choose a five-year ARM, an even lower interest rate of 3.9% amortized for thirty years would be a rock-bottom $943 per month principal and interest payment.

It’s important to note that the cheapest interest rates will go to the borrowers with the highest credit scores. The interest rates in the previous examples were for “good” credit which is a credit score of 660+ with a minimum of ten percent down on a conventional loan. If your score isn’t that strong, you’ll be required to pay more interest which will, of course, increase your monthly payment.

And homeownership isn’t merely about the size of the payment. It’s a monthly coupling of property taxes, homeowner’s insurance, and, if you don’t make a 20% down payment on a conventional mortgage, you’ll have private mortgage insurance. Many consumers’ downfall is the inability to budget for ongoing miscellaneous costs of ownership. That’s why it’s good to set up a separate savings account and deposit monthly to it to cover maintenance and repairs costs. When the furnace fails, it’s out of your pocket. If air conditioning costs soar in the summer, you write the check. Don’t assume that costs won’t come, it’s merely a matter of when so be prepared.

Before you jump into home buying, why not sit down with someone who’s owned a home for a matter of years, like a parent or older sibling. Ask them to share what they wish they’d known early on regarding home ownership. Personal stories from people you respect can serve as good lessons on what to do and what to look out for in buying your first home. If you’re financially and mentally prepared to tackle the challenges of home ownership, today’s rock-bottom rates can help serve as a spring board to an affordable first home.